What is an asset-based approach?
An asset-based approach is a type of business valuation that focuses on a company’s net asset value. Net asset value is determined by subtracting total liabilities from total assets. There is some room for interpretation when deciding which assets and liabilities of the company to include in the valuation and how to measure their value.
The central theses
- There are several methods available to calculate the value of a company.
- An asset-based approach identifies a company’s net worth by subtracting its liabilities from its assets.
- Asset-based valuation is often adjusted to calculate a company’s net asset value based on the market value of its assets and liabilities.
Understand an asset-based approach
Recognizing and maintaining awareness of a company’s value is an important responsibility of finance leaders. Overall, returns for stakeholders and investors increase as a company’s value increases, and vice versa.
There are different ways to determine the value of a company. Two of the most common are equity value and enterprise value. The wealth-based approach can also be used in conjunction with these two methods or as a standalone assessment. Both equity value and enterprise value require the use of equity in the calculation. If a company does not have equity, analysts can alternatively use asset-based valuation.
Many stakeholders will also calculate asset-based value and incorporate it extensively into valuation comparisons. Asset-based value may also be required for private companies in certain types of analysis as additional due diligence. In addition, asset-based value can also be an important consideration when a company is planning a sale or liquidation.
The asset-based approach uses the value of assets to calculate a business unit’s valuation.
Asset Based Value Calculation
In its simplest form, asset-based value is the company’s book value or equity. The calculation is made by subtracting liabilities from assets.
Often, the value of assets less liabilities differs from the value reported on the balance sheet due to timing and other factors. Asset-based valuations can provide scope for using market values instead of book values. Analysts may also include certain intangible assets in asset-based valuations, which may or may not be included on the balance sheet.
Net Assets Adjustment
One of the biggest challenges with a wealth-based valuation is the adjustment to net worth. An adjusted asset-based valuation attempts to determine the market value of assets in the current environment. Balance sheet valuations use depreciation to reduce the value of assets over time. Therefore, the carrying amount of an asset does not necessarily equal fair value.
Other considerations for adjustments to net assets may include certain intangible assets that are not fully valued on the balance sheet or included on the balance sheet at all. Companies may not find it necessary to value certain trade secrets. However, since an adjusted asset-based approach examines what price a company could potentially sell for in the current market, these intangibles need to be considered.
An adjusted net worth calculation can also make adjustments for liabilities. Market value adjustments can potentially increase or decrease the value of liabilities, which directly affects the calculation of the adjusted net assets.